Here Is How the Federal Reserve Could End the Bull Market in Stocks

The Federal Reserve is stuck in a major pickle -- and it's not about how many times to raise interest rates this year.

The problem stems from years and years of asset purchases -- known as quantitative easing. Under the program, the Fed purchased bonds and mortgage-backed securities from banks in the years following the 2008 financial crisis, hoping the companies would use the cash to lend money and stimulate the economy.

Along with record low interest rates, the initiative was a key part of the central bank's accommodative monetary policy.

Now, the Fed has accumulated some $4.45 trillion of these assets, according to Bloomberg data. And even though the central bank stopped expanding its quantitative easing program toward the end of 2014, it has continued to reinvest the proceeds from maturing securities, maintaining the portfolio's size.

"The markets are rightfully -- and remain -- addicted to that reinvestment," said Danielle DiMartino Booth, author of Fed Up: An Insider's Take on Why the Federal Reserve is Bad for America.

The big question now is how the Fed unwinds its balance sheet without shocking the markets. According to Booth, many investors discounted the possibility that the Fed would eventually do so, but officials have been dropping hints lately that they may be ready to start.

If they act, "I think we are going to be in for some bumpy weather in the bond market," she said.

Unwinding the assets, or selling them, has a similar effect on the economy as raising interest rates, which has been the Fed's focus lately.

"If they were to do both, that would effectively be a double-tightening regime," she said.

According to Booth, stock and bond investors are not prepared for this scenario: the Fed unwinding its balance sheet and sticking to its forecast of three rate hikes this year.

Global oil prices tumbled to fresh 14-month lows Tuesday as investors dumped crude amid concerns over slowing growth in some of the world's biggest energy consumers and data showing U.S. crude production is likely to surge to new record highs into 2019.